FRANKFURT (Reuters) -The European Central Bank is increasingly confident that inflation will fall back to its 2% target by mid-2025 as wage growth moderates, strengthening the case for lower interest rates, ECB board member Piero Cipollone said on Wednesday.
The ECB has flagged a possible rate cut for June depending on further good news on wages and the comments from Cipollone, in his first major policy address since joining the board, suggest the process was heading in the right direction.
"Wage growth appears on track to gradually moderate in the medium term towards levels that are consistent with our inflation target and productivity growth, in line with the projections," Cipollone told an event in Brussels.
"As our confidence in the timely convergence of inflation to our target grows, it also strengthens the case for adjusting our policy rates," Cipollone said.
Investors now expect the ECB to cut rates in June but they are split on whether two or three more moves would come before the end of this year.
The bank has placed an oversized emphasis on first quarter wage data, due out in late May, suggesting that the rate path is unlikely to be clear for some time yet.
Compensation per employee declined to 4.6% in the fourth quarter from 5.1% three months earlier but remains well above the 3% level the ECB considers to be in harmony with 2% inflation.
Still, Cipollone cautioned against excessive focus on short-term wage developments, arguing that a recovery in household earnings was necessary and even after such a catch up, real wages would still be below levels justified by labour productivity growth since the pandemic.
"Excessive focus on short-term wage developments may not take into full consideration the recovery in wages that can – and needs to – take place for the euro area’s currently fragile recovery to gain a stronger footing," he said.
He added economic uncertainty has receded so the ECB is also becoming more confident in its own projections, which show a continued slowdown in inflation with the target hit next year.